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Fed Likely to Cut Rates: ETFs to Gain or Lose (revised)
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All eyes are currently on the crucial two-day FOMC meeting slated to start on Jun 30. Federal Reserve Chair Jerome Powell is highly expected to cut interest rates by a quarter point for the first time in more than a decade due to a slowing global economy and low inflation in the United States. According to CME Group’s FedWatch tool, the market is pricing in a 100% chance of at least a 0.25% Fed rate cut this week (read: ETFs to Grab Amid Increased Odds for Fed Rate Cut).
Is the Timing Right for a Rate Cut?
American economy is still strong with rising consumer confidence and spending as well as unemployment near a 50-year low. However, manufacturing activities have slowed down while business investments have become muted. Inflation pressure is low.
Global trends are on the weaker side amid trade friction that has increased global growth fears. The International Monetary Fund last week slashed its global growth outlook by 0.1 percentage points for this year to 3.2% and for the next year to 3.5%. This is the agency’s fourth downgrade since October. It warned that U.S.-China tariffs, U.S. auto tariffs, or a disorderly exit of Britain from the European Union would sap confidence, weaken investment, disrupt global supply chains, and further slow global growth.
Further, the bond market signals a recession with the inversion of the yield curve, in which short-term interest rates are higher than the long-term ones. All these data indicate a softening economy (read: ETF Strategies to Follow If Fed Cuts Rate).
Given this, several ETFs are in focus, which may see outsized volume following the upcoming Fed meet. A few ETFs will benefit if the Fed cuts rates as expected, while a few may be adversely impacted. Let’s have a look at them:
Gold will continue to shine as lower interest rates will increase the metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will see smooth trading. The fund tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $37.3 billion and average daily volume of around 7.8 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Grab These ETFs & Stocks on Gold Rush).
Emerging market stocks will get a boost, as lower rates will push the U.S. dollar down, injecting more capital into the emerging markets. The ultra-popular ETF, EEM, tracks the MSCI Emerging Markets Index and holds 1,025 securities with none accounting for more than 4% of assets. Among the emerging countries, China takes the top spot at 31.8% while South Korea and Taiwan also receive double-digit exposure each. The fund has AUM of $31.8 billion and average daily volume of about 65.7 million shares. It charges 67 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Dollar's Largest Monthly Loss Since 2018: ETF Winners).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high-yield corner of the fixed income world is the most watched area. This is because lower rates would lower yields on the Treasury notes, thereby raising the sole lure of the high-yield bonds. HYG is the largest and most-liquid fund in the high-yield bond space with AUM of $19.6 billion and average daily volume of around 19.9 million shares. It charges 49 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 996 securities in the basket. The ETF has a Zacks ETF Rank #3 with a High risk outlook.
Lower interest rates will hurt banks as they seek to borrow money at short-term rates and lend at long-term rates. With the fall in short-term interest rates, banks would be able to earn less on lending and pay more on deposits. This will shrink net margins and crimp banks’ profits. KRE is an ultra-popular bank ETF having AUM of $2.3 billion and average daily volume of 7.3 million shares. The product follows the S&P Regional Banks Select Industry Index, holding 123 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: Sector ETFs & Stocks to Buy or Avoid Post Fed Meeting).
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Lower interest rates will pull out more capital from the country and lead to depreciation of the U.S. dollar. UUP offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has so far managed an asset base of $292.1 million while seeing an average daily volume of around 568,000 shares. It charges 79 bps in total fees and expenses and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top ETF Events of Wall-Street's Decade-Best June).
(NOTE: We are reissuing this article to correct a mistake. The original version, published yesterday, July 29, 2019, should no longer be relied upon.)
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Fed Likely to Cut Rates: ETFs to Gain or Lose (revised)
All eyes are currently on the crucial two-day FOMC meeting slated to start on Jun 30. Federal Reserve Chair Jerome Powell is highly expected to cut interest rates by a quarter point for the first time in more than a decade due to a slowing global economy and low inflation in the United States. According to CME Group’s FedWatch tool, the market is pricing in a 100% chance of at least a 0.25% Fed rate cut this week (read: ETFs to Grab Amid Increased Odds for Fed Rate Cut).
Is the Timing Right for a Rate Cut?
American economy is still strong with rising consumer confidence and spending as well as unemployment near a 50-year low. However, manufacturing activities have slowed down while business investments have become muted. Inflation pressure is low.
Global trends are on the weaker side amid trade friction that has increased global growth fears. The International Monetary Fund last week slashed its global growth outlook by 0.1 percentage points for this year to 3.2% and for the next year to 3.5%. This is the agency’s fourth downgrade since October. It warned that U.S.-China tariffs, U.S. auto tariffs, or a disorderly exit of Britain from the European Union would sap confidence, weaken investment, disrupt global supply chains, and further slow global growth.
Further, the bond market signals a recession with the inversion of the yield curve, in which short-term interest rates are higher than the long-term ones. All these data indicate a softening economy (read: ETF Strategies to Follow If Fed Cuts Rate).
Given this, several ETFs are in focus, which may see outsized volume following the upcoming Fed meet. A few ETFs will benefit if the Fed cuts rates as expected, while a few may be adversely impacted. Let’s have a look at them:
ETFs to Win
SPDR Gold Trust ETF (GLD - Free Report)
Gold will continue to shine as lower interest rates will increase the metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will see smooth trading. The fund tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $37.3 billion and average daily volume of around 7.8 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Grab These ETFs & Stocks on Gold Rush).
iShares MSCI Emerging Markets ETF (EEM - Free Report)
Emerging market stocks will get a boost, as lower rates will push the U.S. dollar down, injecting more capital into the emerging markets. The ultra-popular ETF, EEM, tracks the MSCI Emerging Markets Index and holds 1,025 securities with none accounting for more than 4% of assets. Among the emerging countries, China takes the top spot at 31.8% while South Korea and Taiwan also receive double-digit exposure each. The fund has AUM of $31.8 billion and average daily volume of about 65.7 million shares. It charges 67 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Dollar's Largest Monthly Loss Since 2018: ETF Winners).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high-yield corner of the fixed income world is the most watched area. This is because lower rates would lower yields on the Treasury notes, thereby raising the sole lure of the high-yield bonds. HYG is the largest and most-liquid fund in the high-yield bond space with AUM of $19.6 billion and average daily volume of around 19.9 million shares. It charges 49 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 996 securities in the basket. The ETF has a Zacks ETF Rank #3 with a High risk outlook.
ETFs to Lose
SPDR S&P Regional Banking ETF (KRE - Free Report)
Lower interest rates will hurt banks as they seek to borrow money at short-term rates and lend at long-term rates. With the fall in short-term interest rates, banks would be able to earn less on lending and pay more on deposits. This will shrink net margins and crimp banks’ profits. KRE is an ultra-popular bank ETF having AUM of $2.3 billion and average daily volume of 7.3 million shares. The product follows the S&P Regional Banks Select Industry Index, holding 123 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: Sector ETFs & Stocks to Buy or Avoid Post Fed Meeting).
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Lower interest rates will pull out more capital from the country and lead to depreciation of the U.S. dollar. UUP offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has so far managed an asset base of $292.1 million while seeing an average daily volume of around 568,000 shares. It charges 79 bps in total fees and expenses and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top ETF Events of Wall-Street's Decade-Best June).
(NOTE: We are reissuing this article to correct a mistake. The original version, published yesterday, July 29, 2019, should no longer be relied upon.)
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>